Help Millennials Make Better Financial Decisions

On January 31st, Decision Fish led a lively session on how to Help Millennials Make Better Financial Decisions as part of Impact Hub NYC’s 100 Days of Impact program. 100 Days of Impact is intended to figure out what we can do as a community to address concerns and make an impact in an era of fear, uncertainty and doubt. We recommend that our readers in New York City participate in future workshops.

Planning for an Uncertain Future

Tim Herrera, the “Your Money” columnist for the New York Times, reported in October 2016 that only 24 percent of millennials have “basic financial knowledge,” and just 27 percent are getting professional financial help, according to a study from George Washington University’s Global Financial Literacy Excellence Center and PricewaterhouseCoopers. Half of millennials are concerned about student loan debt, nearly half couldn’t come up with $2,000 in 30 days in case of an emergency and only a third are satisfied with their financial situation, according to the study.

All of this is even before the uncertainty under Trump’s administration. How will this administration’s proposed changes affect Millennials who are already struggling? The goal of our workshop was to provide millennials tools they can use to make wise financial decisions, as well as to ease concerns about the uncertainty and to uncover hidden opportunities.

Given that we were only ten days into the new administration, uncertainty around these changes was rather high. Questions abounded, such as as whether the Fiduciary Rule, signed in June 2016 to protect consumers from conflicts of interest in retirement planning, will be upheld and whether the Consumer Financial Protection Bureau, which protects consumers from abusive practices and provides tools for making smart financial decisions, will continue to be funded.

We began by discussing how uncertainty about a variety of potential changes in financial regulations is universally high and then drilled down to specific concerns of the millennial generation. Workshop attendees were predominantly millennials, with a few Generation Xers.

Key financial challenges that millennials face with respect to debt, saving, spending and planning include the following:

Student loan debt totals $1.4 Trillion in the US; and rising.

Mistrust is high; between “alternative facts” and the fear of financial firms profiting off our ignorance, how do we know whom to trust?

Low signal to noise ratio; an abundance of information mixed in with marketing, can be overwhelming and confusing.

In addition to these external challenges, cognitive bias is a challenge that comes from within. We discussed some of the cognitive biases that get in the way of making sound financial decisions. Fear of uncertainty, of missing out on a good deal, of being exposed to our peers as financial novices, present bias, choice/information overload, inattention and procrastination were all concerns that workshop attendees brought up.

Framing the Decision-Making Process

To address uncertainty, it is helpful to follow a framework for decision-making that considers potentially unknown challenges. The OODA Loop, developed by Colonel John Boyd of the U.S. Air Force, describes a process for decision-making as a feedback loop between observation and action in which decisions are oriented by various aspects of known information and past experiences. The orientation is continually updated based on unfolding circumstances and interactions within the environment.

In the OODA Loop framework, it is assumed that circumstances and interactions result directly from actions of adversaries, but they can often be circumvented by the habits and biases of an individual that prevent the actor from considering new and changing information. Without adequately processing the feedback, we may jump from directly from observation to action to our detriment.

As we discussed the Challenges, Characters and Components of the financial decision-making landscape, we drew a chart to come up with the Characteristics of a good outcome. These Four Cs are shown in the image below.

Components of financial decisions for Millennials include savings, student loans, literacy training, credit cards and prepaid cards, budgets and nudges, or the default settings and reminders that affect our actions. There may be many more components, each affected by its own set of constraints and opportunities.

Characteristics of a desired outcome include a secure retirement, productivity-enabling technologies, automated actions, financial literacy and awareness, the ability to track expenses and a growing preference among Millennials for experiences over material goods. Someone mentioned robo-advisors as an example of a helpful technology, but that may be concerning if the underlying algorithms are not transparent or understood well by the user.

Challenges, discussed above, include debt, mistrust, “alternative facts” or noise and misinformation, uncertainty around the future of healthcare, choice overload and cognitive biases.

Characters include all of the individuals and entities involved in helping make a financial decision. These include the individual making a decision, lenders, bursars, insurers, advisors, brokers, parents and other people who have been there, as well as organizations like the CFPB and the Trump Administration.

At one point, an attendee added a fifth C: Catastrophes on the horizon. These additional challenges highlight concerns about uncertain future outcomes and led to a lively discussion of the fears Millennials have about external factors over which they may not have control: loss of healthcare, loss of financial protections, the potential institution of a national austerity budget or even war.

What Can We Do Today?

After some discussion, we came up with the following things we can do to make an impact.

Community Programs: Get financial education into community centers, high schools, libraries, immigration and language centers and other community organizations.

Create and promote resources provided by the Consumer Financial Protection Bureau. Protect and monitor the availability of CFPB resources and archive them in case the bureau is defunded.

Discuss finances with friends to create a comfort level around what we know and don’t know about money.

Create a “financial GPS” to monitor and inform people about their daily spending habits.

Develop a guide for student debt that addresses present bias, or the tendency to prioritize near term gains over long term security.

Encourage your company to set up a student loan forgiveness program.

Set up a daily bank balance reminder.

Start guidance early: teach financial literacy in high school or even earlier.

Sign up for automated savings where available.

Invest in social lending programs, like Kiva, to give underserved borrowers a leg up.

Of these ideas, workshop attendees felt the most effective way to make an immediate impact was to talk to their friends about what they learned, and to be alert for possible changes to Federal financial regulations. Keeping each other informed, sharing new apps and resources and asking honest questions is a way for Millennials to manage the doubt and insecurity around their financial futures. Knowing that we are not alone is a good lesson to take away from our activity.